The FRC indicates that, despite the challenging reporting environment brought about by events such as COVID-19 and Russia’s invasion of Ukraine, there has not been a decline in the quality of corporate reporting by FTSE 350 companies.  It notes that although there have been improvements in certain areas such as the reporting of judgements and estimation uncertainty, impairment of non-financial assets, alternative performance measures, revenue and climate-related reporting, there is scope for improvement in other areas. 

These include financial instruments, where expected credit loss provisioning remains an area of focus, and support for the recognition of deferred tax assets.

The top area of findings, with twice as many errors identified compared to the prior year, are cash flow statements which remain an area of ‘considerable concern’.  The FRC has signalled its intention to focus on cash flow statements in its 2022/23 review cycle. 

Regarding climate-related disclosures, although companies had ‘generally risen to the challenge of mandatory TCFD reporting’, the FRC highlights that this is an area where companies should focus to improve the quality of their reporting, as set out in more detail in its recent thematic.

For the forthcoming reporting season, which is characterised by heightened uncertainty from rising inflation, slowing economic growth, an energy crisis, increasing interest rates, stresses in supply chains, constraints in the labour market, changing consumer behaviour and against the backdrop of climate change, the FRC expects companies to clearly articulate the impact of these risks on areas such as their strategy, business model, viability and going concern assessments and in the recognition and measurement of assets and liabilities, ensuring consistency across the annual report and accounts.  The FRC also highlights specific areas of consideration for companies with a particular focus on inflation and rising interest rates .  

The findings follow a review of 252 annual reports and accounts with weighting in favour of the FTSE 350.  The report identifies that the ten most frequently raised topics where improvements to reporting quality are needed are:

• Cash flow statements
• Financial instruments
• Income taxes
• Strategic report and other Companies Act 2006 matters
• Revenue
• Provisions and Contingencies
• APMs
• Judgements and estimates
• Impairment of assets
• Presentation of financial statements and other

Each of these topics is analysed in detail in the report with key findings and significant issues encountered from the reviews. For each area the FRC has highlighted points, including specific considerations relating to inflation and interest rates (where applicable), that companies may wish to consider when preparing their forthcoming annual report and accounts. 

Whilst not in the ‘top ten’ list of areas noted above, the FRC also highlights recurring issues it has encountered with respect to leases and draws attention to the findings of its recent thematic in this area.

The report highlights the FRC’s key disclosure expectations for 2021/22. It expects:

• Unambiguous description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, and cross-referenced to relevant detail in the reports and accounts.
• Specific, balanced and well-integrated information about the impact of climate change on the company in narrative reporting, and appropriate reflection of material climate-related commitments, risks and uncertainties in the financial statements; clarity about the relationship between assumptions and sensitivities considered in any TCFD scenarios (including any Paris-aligned scenarios) and those applied in the financial statements.
• Impairment disclosures that assign values to, and explain how, the key assumptions used have been determined, with reference to future expectations regarding external conditions and the company’s own strategy.
• Clear disclosure of significant management judgements and key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of reported amounts to changes in assumptions.
• Transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements; the use of factoring and reverse factoring in working capital financing and the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
• Company-specific information that meets the disclosure objectives of the relevant accounting standards and not just the specific disclosure requirements. Additional information (beyond the standards’ requirements) should be included where needed to understand the impact of particular transactions, events or circumstances.
• Clear explanation of the nature of significant inflationary features in revenue, supply, leasing and other financing contracts, and their effect on the financial statements.
• Clear, concise and understandable disclosure that omits immaterial information.

Alongside the report the FRC has also published a ‘Key matters for 2022/23 Annual reports and accounts’ document aimed at CEOs, CFOs and Audit Committee Chairs which complements the messages in the review, highlights key findings and provides key focus areas for the coming reporting season including links to other relevant documents.

A press release, highlights report, full report and the ‘Key matters’ document are available on the FRC website.